Wall Street’s ‘meh’ feeling towards Biden doesn’t extend to green-energy stocks

ESG investing has grown from a niche area to a $30tn market since financial crisis

Few market trades have benefitted from Democratic nominee Joe Biden’s widening lead in the US presidential election polls as green-energy stocks.

Few market trades have benefitted from Democratic nominee Joe Biden’s widening lead in the US presidential election polls as green-energy stocks.

 

Wall Street can’t quite make its mind up about what to make of an increasingly likely Biden victory – assuming the pollsters are right this time – less than three weeks from now.

Donald Trump may have been socially and politically divisive in power but US stock investors have lapped up the Republican president’s tax cuts and rolling back of financial and environmental regulations.

Even as critics decry the 45th US president’s handling of the coronavirus pandemic as being ultimately reckless for the world’s largest economy, a Gallup poll carried out late last month found that 56 per cent of Americans consider themselves to be “better off” than they were four years ago in the final days of the Obama administration.

“The US stock market has generally had a negative immediate reaction to Democrats winning the White House, ” according to Daniel Moroney, an investment strategist with Brewin Dolphin Ireland. “Nevertheless, this negativity has tended to be short-lived, to the extent that markets have been strongest in the year following a Democrat winning the White House.”

The worst possible outcome for markets, of course, would be a contested election. Trump has so far refused to commit to a peaceful transfer of power if he loses.

But, aside from rising interest among currency dealers for the Mexican peso (remember how it got clobbered when Trump swung to power?), few trades have benefitted from Democratic nominee Joe Biden’s widening lead in the polls as green-energy stocks.

The First Trust Nasdaq Clean Edge Green Energy Index Fund, where top investments include electric car market Tesla and wind farm operator Brookfield Renewable Partners, has surged by about 30 per cent in the past three weeks.

The iShares Global Clean Energy ETF has advanced almost 25 per cent over the same period as investors have put down money on faith that Biden’s $2 trillion plan to boost green energy and stop all climate-damaging emissions from US power plans by 2035 – and cut overall emissions from the economy to net-zero by 2050 – will happen.

The former vice-president is leading Trump by 54 per cent to 43 per cent, according to the latest NPR/PBS NewsHour/Marist poll, published on Thursday.

By contrast, the S&P Energy Sector Index, where major components include Chevron and Exxon Mobil, has traded lower in in the past month, bringing its slump so far this year to about 50 per cent, as the economic shock from the pandemic has hit demand for fossil fuels.

Sustainable finance, or ESG (environmental, social and governance) investing, has grown exponentially since the financial crisis from a niche area to a $30 trillion market, according to some estimates.

Climate crisis

The Covid-19 pandemic has fuelled public awareness of the growing climate crisis, turbo-charging sales of ESG funds even as the sector has been criticised for enabling “greenwashing”, given that there are no globally accepted, clear-cut criteria about what makes a company eligible for inclusion in such a fund.

A record $71 billion was invested in ESG funds during the second quarter, the height of lockdowns, according to investment research firm Morningstar.

The ESG industry is premised on the notion, first promoted by a groundbreaking 2005 UN report, called Who Cares Wins, that companies that score highly on factors such as managing carbon risk, health and safety and diversity, will do better in the long run than peers.

Another Morningstar study published during the summer said almost 60 per cent of European ESG funds delivered better returns over the past decade than traditional equity funds – pouring cold water on the view that there is a financial trade-off when it comes to sustainable investing.

The world’s wealthy are also keen to be seen to be wrapping themselves in green. A survey of 300 richest individuals, families and family offices – with an average net worth of almost $900 million – found that,on the whole, they planned to increase their allocation to “impact investing” from 20 per cent last year of their portfolios to 35 per cent by 2025, according to a report published this week by Campden Wealth, Global Impact Solutions Today and Barclays Private Bank.

“With the Covid-19 global pandemic being a ‘wake-up call’, pressure on investors is building further to widen risk assessments and target social/environmental objectives when making investments,” the report said.

Central bankers have also been wading in. European Central Bank president Christine Lagarde said this week that there needs to be a greater push into “green” projects if countries are serious about meeting their climate protection goals. She has been a strong advocate for ECB monetary policy to have a strong green hue since arriving in Frankfurt a year ago.

A report from the Bank of International Settlements (BIS), the bank for central banks, in January built the case for why central banks need to become more involved in tackling climate change as it is “increasingly recognised” as a “source of major systemic financial risks”.

(Let’s overlook the fact that one of the report’s predictions, that a “green swan” event – a play on a black swan phenomenon of when a severe, unexpected event occurs – could cause the next financial crisis, didn’t survive a month, as Covid-19 swept through western economies.)

But while central banks took a lead in saving the world during the financial crisis – and, more recently, during Covid-19 – the report warns that they won’t always be able to come to the rescue.

“The prime responsibility for ensuring a successful low-carbon transition rests with other branches of government, and insufficient action on their part puts central banks at risk of no longer being able to deliver on their mandates of financial (and price) stability,” it concluded.

The move to a low-carbon economy carries risks too, with the potential for anywhere between $1 trillion and $18 trillion of fossil fuel assets being “stranded”, as they become worthless, according to various estimates.

The implications for companies, their lenders, pension funds and geopolitics are immeasurable if it’s not handled carefully.

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